Helping employees chase their dream home

A unique mortgage benefit saves employees money. Is it time to add home ownership to your benefit plan?

For most Canadians, mortgage financing is the harsh reality behind the dream of home ownership.

According to Statistics Canada, more than four million Canadian dwellings are mortgaged. This results in a great opportunity for employers to provide a valuable benefit to their employees through a group mortgage plan.

Group mortgage plans have existed in one form or another for more than a decade. The benefit takes advantage of a little-known section of the tax act through which employers can subsidize — or buy down — the interest rate of their employees’ mortgages. Companies can implement a group mortgage plan as an employee benefit or as part of a corporate relocation package.
For employers, it is a tax-deductible expense. For employees, it is a tax-effective benefit.

The tax-effectiveness of a mortgage subsidy is determined by three factors:
1) the interest rate on an employee’s mortgage;
2) Canada Customs and Revenue Agency’s prescribed rate; and
3) the amount of the subsidy provide by an employer.

Typically, there is a one per cent to 2.5 per cent difference between the prescribed rate and the interest rate on a five-year closed mortgage term. The subsidy will not confer a taxable benefit to the employee if the mortgage rate minus the subsidy is greater than the prescribed rate at the time of funding the mortgage.

For example, the prescribed rate is six per cent, and the five-year mortgage rate is 8-1/4 per cent. The employee is entitled to the discounted rate of 7-1/4 per cent as negotiated between the employer and the lending institution. The employer could further buy down the rate to as low as six per cent without conferring a taxable benefit to the employee.

“It doesn’t matter what the employee’s net worth is. There is no haggling and no negotiation at the employee level,” says Sharon Castelino, director of corporate mortgages, CIBC Mortgages, Inc. “There are very few occasions where the employee can beat what we’ve negotiated with the employer, or what the employer has negotiated with us.”

In essence, the employee gets a mortgage of six per cent, the employer pays 1-1/4 per cent, and the lending institution absorbs one per cent.

Employers can select from three options of group mortgage benefits:
1) a flat-dollar subsidy (paid annually, monthly, or by mortgage term);
2) an interest rate buy-down subsidy; or
3) relocation subsidy.
The opportunity to offer group mortgage benefits is not limited to large corporations. Any size of business can offer the benefit to its employees, as can trade and professional associations to their memberships.

Through a group mortgage benefit, an employee could enjoy a higher disposable income through a lower monthly mortgage payment. Alternatively, an employee could keep the payment at the higher amount and effectively pay the mortgage down faster.
The tax-effective benefit plan provides employees with better mortgage value and guaranteed lower rates. Generally, employees satisfaction will be increased through an enhanced benefits package.

The primary reason for an employer to offer a group mortgage plan benefit is the retention of employees, and the attraction of desired talent with a subsidized mortgage benefit available through employment with the organization.

In addition to not necessarily increasing the company’s benefit plan costs, a group mortgage plan can be a tax-deductible expense for an employer. This is compounded further by the plan’s ability to limit expenses related to corporate relocations.

For many employers, the largest expenses associated with employee relocation are penalties for early mortgage discharge.

For example, an employee in Montreal owns a home valued at $150,000 which carries an existing mortgage of $100,000. As a result of a corporate relocation to Calgary, the employee would be required to purchase a comparable home for $250,000. This means the employee, employer, or both would be required to pay the early discharge penalty. The employee would reinvest the $50,000 equity already amassed, and take out a new mortgage for the $200,000 balance.

Under a relocation subsidy, the employee would transfer the existing mortgage of $100,000 to the new home in Calgary, and arrange a second mortgage for the incremental amount of $100,000. The term of the second mortgage would be matched with the maturity of the first mortgage. The employer would subsidize the interest cost of the second mortgage under a relocation benefit. At maturity, the employee could consolidate both mortgages for the combined principal amounts.

Prior to offering a group mortgage plan, the employer must determine which employees will be eligible to participate (i.e.: executive, management, relocating, or all employees), and the amount and type of subsidy.

There are several mortgage lending institutions offering turnkey administration and seamless integration of group mortgage plans. Companies such as CIBC Mortgages, First Line, President’s Choice
Financial, and Sutton handle all aspects of the benefit plan including administration, marketing taxable benefit reporting and automated billing.

In conjunction with a group mortgage plan, some institutions offer cash-back, legal fee and home appraisal rebates.

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